The Financial Industry Regulatory Authority Inc. and a former UBS broker are in court battling over an unusual order for expungement that cleansed the broker's record of 10 customer complaints that were settled for a total of $1.4 million.
Finra is arguing that its own arbitration panel improperly granted expungement last year for seven of those complaints.
In legal filings, broker Jason Schall claims that Finra has no choice but to confirm the award under the law in South Carolina, where he is based.
The case began in 2009, when Mr. Schall filed an arbitration claim alleging that UBS Financial Services Inc. put the complaints on his record as part of a scheme to injure his reputation. UBS and Mr. Schall settled under undisclosed terms. UBS declined to comment.
The current controversy erupted from a subsequent hearing on the expungement.
In its order awarding expungement, the Finra panel said that Mr. Schall had no involvement with several clients, that it found no evidence of improper behavior and that in three cases the customers were sophisticated investors who understood the option-writing strategies about which they had complained.
But Finra says the panel heard only one side of the story. Most of the “customers were not given notice of the proposed expungements or the opportunity to be heard,” which violates its rules, Finra stated in a July court filing.
Further, Finra says, two of the customer claims were filed against Wells Fargo Advisors LLC, where Mr. Schall worked after UBS, and another of the expunged cases was being heard by a separate arbitration panel at the same time the Schall arbitrators expunged it. Finra also says that, of the 10 cases it expunged, the Schall panel reviewed only one settlement agreement.
Finra requires arbitrators to review the facts in a request for expungement, as well as settlement agreements between brokers and customers. Expungement can be granted only if arbitrators determine that a claim is factually impossible, clearly erroneous or otherwise false, or that the broker was not involved.
Once a broker wins a customer-related expungement based on one of those criteria, the award must be confirmed by a court. Finra must be named as a party in court requests so that it can contest expungements that do not meet a threshold, as it did in Mr. Schall's case.
“Finra has opposed arbitrator-ordered expungement in a small number of instances in which one of these thresholds was not met,” Michelle Ong, a spokeswoman for the regulator, said in a statement.
“If the person seeking the ex-pungement nevertheless seeks a court order [to confirm expungement], Finra will litigate — Schall being one of these cases,” Ms. Ong said. “We opposed expungement because the award did not comply with the rule in several respects.”
Neither Mr. Schall nor his attorney, Mitchell Willoughby, a partner at Willoughby & Hoefer PA in Columbia, S.C., could be reached for comment.
Mr. Schall and Finra concluded oral arguments in a South Carolina state court in July. A decision is pending.
“The bottom line is, arbitrators can expunge a [customer] case [or] complaint only after conducting a thorough hearing to basically show that the broker didn't do it,” said David Robbins, a partner at Kaufmann Gildin Robbins & Oppenheim LLP, who is not involved in the case.
A RARE CHALLENGE
“It's hard to judge without sitting in the [hearing], but it just looks at first blush like the [Schall] panel overstepped its bounds,” said Chris Vernon, a founding partner of Vernon Healy PLLC, who is not involved in the case, either.
Mr. Robbins echoed that thinking. “Finra rightly said, "We don't agree. We don't believe our arbitrators followed the rules,' “ he said. Such a challenge by Finra is rare, said Mr. Robbins, who has written about securities arbitration procedure.
He expects that the state court will not confirm Mr. Schall's award.
Mr. Schall's public disciplinary record, going back to 1996, shows a total of 12 customer complaints, with nine ending in settlements totaling $1.67 million. Two complaints resulted in no action, and one remains pending. Six involved options, and one was an auction rate securities case for which Mr. Schall was not responsible, UBS said in a regulatory filing.
Mr. Schall, who did not personally contribute to any of the settlements, is no longer registered as a broker or investment adviser representative.
Mr. Robbins said the irony for brokers obtaining an expungement is that even though bad marks are removed from Finra's BrokerCheck reporting system, information about the complaints remains in the award, which is publicly available on Finra's arbitration database.
djamieson@investmentnews.com Twitter: @dvjamieson
